Titlos SPV - Back In The Spotlight
Of course, little do we care about such minor things as attribution. As long as the truth is out there...
Greece's fiscal woes, the exposure of the European financial system
to them and the role played by Wall Street in hiding the problems all
converge in a fifth-floor office near London's Liverpool Street station
where a company called Titlos PLC was created in early 2009.
Just 22 days after Titlos was born, the National Bank of Greece SA and Goldman Sachs Group Inc. arranged for the company to sell €5.1 billion, or about $2.04 billion, in notes, according to U.K. and U.S. documents.
But Titlos wasn't a real company and the notes weren't designed for
ordinary investors. Titlos doesn't make anything and its only directors
are two British executives who work for a firm that specializes in the
formation of corporations and the sale of pooled assets.
Instead, Titlos, descendent of a 2001
deal to help Greece hide debt, was set up to take advantage of a
European Central Bank effort to inject cash into a banking market
hobbled by the financial crisis. Titlos's notes were designed to be
pledged for that program, according to filings by Titlos and the
National Bank of Greece, and the buyer was the bank itself.
The history of Titlos also illustrates
how bank and government dealings, often deeply intertwined, can
complicate efforts to unclog a global banking system.
Gustavo Piga, a professor at the
University of Rome Tor Vergata, says the opaque derivative trades that
Greece and other countries engaged in "tarnishes the reputation of
government" as it tries to police financial markets.
"There is this huge mortal embrace between the government and the
banks," Mr. Piga says. "It creates huge conflicts of interest in the
actions of government."
Behind Titlos and the notes sale are Goldman and the National Bank
of Greece, a 169-year-old institution whose operations span Eastern
Europe into Turkey, Serbia and Romania. The bank isn't the country's
central bank, though the government owns a 12% stake through its
Goldman, the National Bank of Greece and the Greek government have
long had close ties. Last week, Greece named Petros Christodoulou, who
worked at both Goldman and the National Bank of Greece, as the
government's new debt chief.
Titlos's origin dates to 2001 and a complex transaction that at its
crux called for Goldman to loan Greece €2.4 billion. The structure
permitted Greece to lower the debt it had.
Over the next decade, the structure would prove to be malleable—and
legal. In total, from 1998 to 2000, Goldman structured 12 currency-swap
agreements with Greece, leading up to the 2001 transaction.
Greece's finance minister last week
said the original transaction met with the legal standards of the
European Union's statistics watchdog. Moody's Ratings Service rated the
"This was a unique deal," says Christoforos Sardelis, the head of
Greece's debt-management agency from 1999 to 2004. "It was made public,
and there was no violation of any rules."
To hedge its credit risk, Goldman
carried out a transaction with a small Dublin firm. The investment bank
also agreed to a new deal with Greece that was structured as a way to
hedge interest-rate risk. That deal compensated Goldman for losses it
was experiencing from the currency swap, according to a person familiar
with the transaction.
Goldman then exited from the interest-rate-swap deal in 2005 when
the National Bank of Greece replaced Goldman as Greece's trading
partner, according to people familiar with that transaction.
In late 2008, with the financial crisis peaking and banks struggling
to borrow from one another or sell pooled assets, Goldman and the
National Bank of Greece identified a way to turn that interest-rate
transaction into an asset that could be pledged at the European Central
Bank for money as part of a program the ECB had set up to exchange bank
collateral for billions of euros in loans.
The program ended up offering a way
for banks to easily make money because they could use the ECB's cheap
money to obtain or hold higher-yielding assets in what is known as a
carry trade. The moves then freed up liquidity for banks, including
those in Greece that have been big users of the ECB program.
"There were a very large number of securitizations done during the
financial crisis, of toxic waste, that were designed precisely for the
purpose of creating collateral for ECB repo loans," said Darrell
Duffie, a Stanford University finance professor and derivatives expert.
"The ECB knew this was happening and decided that they wanted to play
along in order to get liquidity out there."
An ECB spokeswoman declined to comment.
U.K. documents show that Titlos, which
filed its incorporation records Feb. 4, 2009, is housed in a London
financial district office occupied by Wilmington Trust SP, a firm that
caters to corporation formations and securitizations. Both Titlos
directors work for U.S. bank Wilmington Trust Corp. One director, who
describes his occupation as a "director of special purpose companies
for financing transactions," also serves as a director of nearly 200
other enterprises, the U.K. documents show.
To finalize the deal, the National Bank of Greece transferred, or
novated, its role as counterparty to Greece to Titlos, which now meant
that cash flow from Greece would be running through Titlos and that
Titlos would sell notes that then could be pledged to the ECB.
On Feb. 26, just 22 days after Titlos
filed corporation records with the U.K., Titlos sold €5.1 billion in
notes maturing in 2039. The notes, rated "A1" by Moody's Investors
Service, then were repurchased by the National Bank of Greece through a
private placement, according to a National Bank of Greece securities
According to that report, "the notes
will be used as security for obtaining liquidity from the ECB." It
isn't known if the notes currently reside at the ECB. Those collateral
pledges have been subject to a haircut, or charge, levied by the ECB.
One question today is whether a party to the transactions remains at
risk of a large collateral payment following a ratings-agency
downgrade. That concern stems from what happened in 2008 when U.S.
insurance giant American International Group Inc. nearly failed because its own counterparties, including Goldman, demanded payments AIG couldn't cover.
A Titlos prospectus indicates that Greece isn't on the hook for a
collateral payment to Titlos if Greece is downgraded. The National Bank
of Greece, which remained in the transaction to provide hedges for
Titlos, is responsible for collateral payments if the bank is
downgraded to certain levels, according to Moody's.
The notes remain tightly intertwined,
though, with Greece. In December, Moody's downgraded the notes to "A2,"
midway between the ratings agency's highest triple-A rating and its
first junk-bond grade, from A1 after the ratings agency had downgraded
Greece to A2 from A1.